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Republicans propose major change for the Fed

House Republicans want to force the Federal Reserve to adopt strict rules to guide its monetary policy, or else face a thorough audit of its books.

New legislation that will be considered Thursday by the House Financial Services Committee would place significant restrictions on how the Fed conducts monetary policy and regulates banks while subjecting it to added scrutiny from lawmakers.

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"Over the past several years, the Federal Reserve has gained unprecedented power, influence, and control over the financial system while remaining shrouded in mystery to the American people,” said Rep. Bill Huizenga (R-Mich.), a top sponsor of the measure.

The bill is part of a yearlong effort by the banking panel to study the Fed and consider ways to overhaul its operations. Conservative Republicans, including Chairman Jeb Hensarling (R-Texas), have been critical of the Fed’s policies over the last several years, and the push to subject the central bank to further scrutiny has gained traction with the right.

The bill would require the Fed to make decisions on interest rate movements based on a specific, public equation that is based on inflation and economic data. Such a provision would tie the hands of Fed officials further, while advocates of such a rule-based approach say it would provide clarity to the public about how the Fed will operate.

Conducting monetary policy based on a hard rule has been dubbed the “Taylor Rule,” named after John Taylor, the Stanford economist who advised Mitt Romney during his presidential run who was thought to be leading pick to head the Fed had Romney won.

If the Fed fails to adopt a sufficient rule, the bill would require the Government Accountability Office to conduct a full audit of the Fed’s monetary policy operations — a prospect Fed officials past and present have staunchly opposed.

The Fed would also face significant restrictions on its regulatory efforts, as any new rules written by the central bank would have to undergo cost-benefit analysis before taking effect. The legislation would also require the head of the Fed to testify twice as often before the Financial Services and Senate Banking committees, appearing four times a year before each.

In addition, the “blackout period” in which Fed officials do not speak before and after a policy-setting meeting would be trimmed and clarified. Lawmakers said their efforts to oversee the Fed were often frustrated by such periods, as Fed officials refused to testify or answer questions, even on matters not directly tied to monetary policy.